EU Leaders Sign 'Fiscal Compact' Treaty

3/2/2012 8:19 AM ET

Leaders of twenty-five EU nations on the second day of the summit signed the "fiscal compact" agreement in Brussels, to enforce tougher budget discipline. The U.K. and the Czech Republic refused to sign the deal.

The German-inspired agreement, which is due to take effect on January 1, 2013, includes a requirement for national budgets to be in balance or surplus. Moreover, the balanced budget rule must be incorporated into the member states' national legal systems.

In the event of deviation from this rule, an automatic correction mechanism will be triggered. The content of the treaty had been endorsed at the last European Council meeting in January.

To take effect, this agreement also known as Treaty on Stability, Coordination and Governance should now be ratified by at least 12 euro area member states. If a country fails to ratify the treaty, it would be blocked from bailout funding by spring 2013. Ireland, which has previously rejected certain EU treaties, will hold a referendum on the issue.

During the signing ceremony, European Union President Herman Van Rompuy said it would help prevent a repetition of the sovereign debt crisis. "It will thus also reinforce trust among Member States, which is politically important as well."

"The targets on deficits and debts are intermediate targets, no aim in itself," he added. The summit is focusing on the strategy for jobs and growth.

German Chancellor Angela Merkel said the agreement is a milestone for the EU. It is a step to ensure growth in the region.

Under the pressure from world leaders, Eurozone ministers on Thursday decided to accelerate the payment to the region's permanent bailout fund. They also expressed their readiness to aid Greece using money from the second rescue package, but on condition that Greece completes the debt write-off deal with its private lenders in the coming week.

The meeting of G20 finance ministers and central bank governors held in Mexico over the last weekend demanded that Europe strengthen its bailout fund before leading economies provide extra support to raise the resources of the International Monetary Fund.

Europe faces another deadline on March 13, when the troika completes the review of the progress made by Greece in the deficit cut program, which would then clear the way for the IMF decision on releasing its share of the EUR 130 billion bailout money.

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